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IFRS 16 Leases

IFRS 16 explained

IFRS 16 affects the way all companies who report under International Financial Reporting Standards declare the value of property and high value assets they have leased or rented. Common examples of this could be offices, factories, car parks, vehicles, machinery, computer equipment and other assets not owned by the business but leased on long-term contracts. 

IFRS 16 differs from previous reporting standards for leases, as it uses a ‘right-of-use’ model. This means that if a company has control over, or right to use, an asset they are renting, it is classified as a lease for accounting purposes and must be recognised as that on both their balance sheet and profit and loss accounts.

Previously, leases for large financial liabilities were split into finance leases and operating leases. Operating leases were held off-balance sheet and were accounted for only on profit and loss accounts. IFRS 16 requires that most leased assets must be reported as an asset if the organisation has control over, or the right to use the asset in question. 

The objective for IFRS 16 is that companies report information on all of their leased assets in a standardised way and there is more transparency regarding companies’ lease assets and liabilities.

 

Examples where IFRS 16 will apply

There are a number of instances where IFRS 16 requires that the asset(s) your organisation has leased needs to appear on your balance sheet. 

A common example might be a building, or part of a building, that your organisation leases and has sole access to during the length of the property rental contract. This needs to appear on your balance sheet as an asset (with other associated costs such as maintenance and cleaning reported separately).

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IFRS 16 and the balance sheet

The rules on IFRS16 can have a significant impact on the financial statements of organisations that lease property and high-value equipment. 

As leased property and equipment needs to be reported as an asset, your accounting and financial ratios may be affected. The business may at first sight appear to be asset-rich, but the lease also means they will carry a large burden of debt, which may have an impact on its ability to raise finance. It may also affect profitability. 

By talking to a specialist IFRS 16 adviser, you can understand the financial implications of this accounting technicality and receive professional advice on your specific situation.

 

How a business accountant can help with IFRS 16 requirements

A specialist business adviser can help you to understand the management accounting treatment of business assets. This may involve: 

  • Explaining, in jargon-free language, the most up-to-date regulations for this area of accounting
  • Helping you to identify assets which need to be reported as leases, and where other contracts are classified as contractual or a service agreement
  • Assisting with the collection of relevant information on these leases, such as terms of business, rental payments, end of lease options and interest rates (where applicable) 
  • Managing the accounting process once the information for the relevant leases has been collated

IFRS 16 is a complex and technical part of business accounting, and whilst this is a general overview of the process, there are, inevitably, many exemptions and variants which organisations should be aware of in order to remain compliant. This is an area where using a specialist accountant will help you understand your current obligations and avoid pitfalls, in a tax-efficient way.

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